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World Bank: U.S. deficits may hurt others

Business Week | April 6, 2005

Continued high U.S. budget and trade deficits could sharply cut economic growth in developing countries by driving up interest rates and weakening the dollar, the World Bank said Wednesday.

Even without the impact of U.S. deficits, average economic growth in China, Russia, India and other developing economies is expected to decline from a three-decade high of 6.6 percent in 2004 to 5.2 percent next year, the bank said in a report on the global economic outlook.

But it said that fall could be sharper if financial markets respond to continued heavy U.S. borrowing by pushing up interest rates.

If rates rise, "and we think that that's what ultimately will happen if there's no (U.S.) policy adjustment, then all developing countries will suffer," said Hans Timmer, a bank economist, at a news conference.

Latin American is especially vulnerable, Timmer said. He said that according to a projection by the bank's economists, if interest rates rise by 2 percent, the 4 percent growth forecast for the region next year "would completely disappear."

A weaker dollar due to rising debt "will hurt trade volumes," Timmer said.

The U.S. deficit in trade and investment income with the rest of the world hit an all-time high of US$665.9 billion (euro512 billion) last year, while the budget deficit soared to a record US$412 billion (euro317 billion).

"The advice that we would give to the U.S. authorities ... is that it's important to move" on deficit reduction, said Uri Dadush, director of the bank's Development Prospects Group.

The report forecasts an average economic growth rate of 5.7 percent this year for developing countries, down from 6.6 percent in 2004. It says that rate should fall to 5.2 percent in 2006.

Dadush said such a decline was healthy, reflecting more sustainable growth after surging economic expansions around the world drove up prices of energy and raw materials.

The report painted a positive picture of developing economies, saying many have lowered trade barriers and pursued prudent spending, holding foreign debt levels steady. It said their total foreign reserves rose by 30 percent last year to US$1.6 trillion (euro1.2 trillion).

"The encouraging economic performance in developing countries in 2004 coincides with sound policies," it said.

Foreign investment in developing economies rose by nearly US$14 billion (euro11 billion) last year to US$165.5 billion (euro127.3 billion), the report said. It said that in Asia, investment rebounded to levels reached before the region's 1997 financial crisis.

Developing economies grew faster than richer countries such as the United States last year by reducing reliance on exports and increasing domestic consumption, the report said. It noted that companies in India, China and Brazil are becoming multinationals and investing abroad.

The survey was released simultaneously at news conferences in Beijing and Paris, marking the first time the World Bank had staged such a release ceremony in China.

"This clearly signifies the growing role that China plays in the global economy," said Bert Hofman, an economist for the bank's Beijing office.

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